Finance – Revision Exercise 1 - solutions Finance – Revision Exercise 1 - Solutions In the solutions: PV = Present value PVIF = Present Value interest factor (Table A.1) PVA = Present value of an annuity PVAIF = Present value of annuity interest factor (Table A.2) FV = Future value FVIF = Future Value interest factor (Table A.3) FVAIF = Future Value interest factor (Table A.4) CF = Cash Flow m = number of compounding periods per year n = number of years r = interest rate 1. PV = What is the present value of £26,250 to be received at the end of 7 years, if the relevant interest rate is 12%? FV (1 + r)n Or, using the tables PV = FV * PVIFr,n (Table A.1) PV = 26250 * 0.4523 2. FV = = £11,873 What is the future value of £1200 if it earns 14% compounded annually for 15 years? PV * (1 + r)n Or, using the tables FV = PV * FVIFr,n (Table A.3) FV = 1200 * 7.1379 3. APR src.doc 2010 = £8,565 What is the Annual Percentage Rate (APR, – or effective rate in USA) if a 10% annual rate is compounded monthly? = (1 + (r/m))m = (1 + (0.1/12))12 1- Finance – Revision Exercise 1 - solutions 4. PVA 5. FVA 6. = 1.104713 = 10.47% What is the present value of a stream of cash flows of £500 per annum for 5 years at 8% interest rate? = CF * PVAIFr,n (Table A.2) = 500 * 3.9927 = £1996 What is the future value of a stream of cash flows of £10,000 per annum for 8 years at 11% interest? = CF * FVAIFr,n (Table A.4) = 10000 * 11.859 = £118,590 What is the return offered if you can invest £1200 now for 6 years and obtain £1900 at the end of that time? FV = PV * FVIFr,n (Table A.3) FVIFr,n = FV PV = 1900 1200 = 1.5833 Look up table A.3, 6 years and across until you get to the closest number to 1.583, then read up for the interest rate = 8%. Using the calculator it will be 1.58331/6 = 1.0795979 7. (1 + R) src.doc 2010 = 7.96% If a company’s nominal cost of capital is 12% and inflation is 3%, what is the real cost of capital for the company?

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